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| Author: | Toni Johnson, Staff Writer |
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Updated: January 5, 2009
At a time of rising dependence on oil and soaring gasoline costs, the potential for supply disruptions for this vital resource and the stability of energy-rich regions pose major concerns. While disruptions can happen anywhere along the supply chain (New Scientist), certain areas are particularly vulnerable. Perhaps the best known of these is the Strait of Hormuz in the Persian Gulf, through which tankers carry 20 percent of the world's oil. But the Russia-Georgia conflict in August 2008 provided fresh concern that even the newest energy corridors – tapping into the Caspian Basin – are vulnerable to geopolitical events. Analysts say the Niger Delta, Iraq, and Venezuela remain significantly vulnerable (PDF) as well. With global supplies of oil already tight, potential supply disruptions could lead to significant increases in already volatile oil prices.
Due to the oil embargo of the 1970s, a number of countries have plans to mitigate the impact of an oil supply disruption. Some have their own strategic reserves to protect against short-term oil shortages. The International Energy Agency, a membership organization to address energy issues, also coordinates national reserves (PDF) among twenty-seven member countries including the United States to share oil reserves during emergencies. After Hurricane Katrina in 2005, a number of countries supplied oil products to the United States; even though United States has a massive strategic supply of crude, the storm knocked out a significant portion of the country's refining capacity.
Supply disruptions, or fear of such, are due to everything from political instability and terrorism to the weather and a lack of long-term investment, says Sarah O. Ladislaw, an energy fellow at the Center for Strategic and International Studies. Accidents, such as a pipeline explosion in late 2007 that cut "critical supplies" (Forbes) of oil from Canada to the United States, can disrupt oil supplies, as can a lack of reinvestment of oil revenues into infrastructure, a problem some experts say is exacerbated by the recent rise in resource nationalism. Ladislaw points out that the best ways to protect against disruptions are to diversify supplies and suppliers, to ensure the economy is running efficiently, and to carefully manage geopolitical relationships.
Major oil and gas production exists in some of the world's most volatile regions. Here is a look at some that generate the most concern.
• Russian and Caucasus Pipelines. In the last decade, Russia has emerged as an energy super-power (EnergyTribune). Russia is the world's second-largest oil producer and the world's biggest producer of natural gas. Other states in the region, including neighboring Kazakhstan and nearby Azerbaijan, also have emerged as significant producers with massive reserves of oil and natural gas. This emerging energy wealth has troubled the Kremlin's relations with some former Soviet states, including Georgia, Belarus, Turkmenistan, and Ukraine. For instance, 80 percent of Russian gas (BNet) is routed through Ukraine, but the countries' relations remain extremely chilly. At the end of 2008, relations soured even further after discussions about prices for future gas shipments (Deutsche Welle) to Ukraine and pipeline transit fees for gas flowing through Ukraine. In the first days of 2009, Russia's state-controlled energy company, Gazprom, cut off natural gas (IHT) shipments to Ukraine. Ukrainian officials in turn blocked shipments of gas from Russia into other parts of Europe. Russia's Prime Minister Vladimir has threatened "serious consequences" for interference with gas exports, which some say echoes a series of threats issued against Georgia prior to the conflict between the two countries in the summer of 2008.
"Arguably the whole Caspian and Central Asian region is vulnerable if Russia really wants to reassert control," says Nick Butler, chairman of Britain's Cambridge Center for Energy Studies. He says that Russia may start insisting that Gazprom be involved in any of the region's future pipeline deals "they regard as strategic or lucrative." The director of Moscow University's Information Analytic Center, Natalya Kharitonova, says "there are too many interests" intersecting in the region "to ignore the ways in which those who produce oil, those who transport it and those who consume it are in geopolitical competition."
Some experts believe that the August 2008 clash between Russia and Georgia is at least in part exacerbated by a fight for control over the region's fossil fuel wealth. There are a number of plans in the works to bypass the Russian pipeline network (PDF) including linking Kazakhstan to the Baku Tbilisi Ceyhan (BTC) pipeline, which runs through Georgia from Azerbaijan into Turkey and can carry more than one million barrels of oil per day. Such plans come at a time when Russian pipelines operate at near capacity and some are deteriorating with age (PDF).
The BTC pipeline was not damaged during the fighting, but one of the partners in the pipeline, BP, temporarily shut down a Georgian portion over fears of attack. Ladislaw contends that the pipeline, which carries about 1 percent of the world's daily oil demand, is so vital that any military conflict near it presents a major concern. However, other events could cause a disruption along the BTC. Shortly before the Russia-Georgia conflict the pipeline was shut down by a fire on the Turkish side that may have been caused by Kurdish rebels.
• Gulf of Mexico. The United States is one of the largest oil and gas producers in the world. Yet a significant portion of the nation's production infrastructure, 30 percent of oil production and more than 20 percent of gas production, sits in the Gulf of Mexico, a region of frequent major hurricanes. The Louisiana Offshore Oil Port (LOOP) is also the nation's biggest oil import terminal. Following Hurricanes Katrina and Rita in 2005, the country experienced a supply disruption of about 8 percent. The storm caused a jump in crude prices that was somewhat eased by a release of oil from emergency petroleum reserves.
Though the 2005 hurricane disruption remains unequalled in recent memory, the Gulf experiences frequent disruptions due to storms—such as the 2008 hurricanes Gustav and Ike, and oil prices often rise with news of a hurricane (Bloomberg) in the Gulf. Analysts Jeff Rubin and Peter Buchanan of the Canadian investment bank, CIBC World Markets, note that production (PDF) in the Gulf is still well below levels projected prior to the 2005 storms. More importantly they note that continuing storms have brought continuing delays to bringing new production on line. An ongoing debate on opening up more offshore drilling in the United States could in the near-term expand drilling (Oil&Gas Journal) in the Gulf which could increase the country's reliance on the region.
• Strait of Hormuz. The strait— the sole waterway that leads from the Persian Gulf into the Arabian Sea— is just twenty-one miles wide at its narrowest and is considered the world's most worrisome chokepoint. It is a vital shipping route for some of the world's biggest oil producing nations, including Saudi Arabia, Iraq, Kuwait, Oman, and Iran. The Gulf region holds more than 60 percent of the world's proven oil reserves and as much as 40 percent of the world's proven natural gas reserves. About 40 percent of the oil traded on global markets travels through the strait.
During the Iraq-Iran War in the 1980s, oil flow through the strait (PDF) was reduced by as much as 25 percent because of attacks on third-party tankers, according to a 2008 report from the U.S. financial management firm Lehman Brothers. During that war, global oil prices more than doubled due to the instability in the region. Currently, one of the biggest threats to the strait is an Iranian government threat to blockade oil shipments should its nuclear facilities be attacked. Caitlin Talmadge, a scholar at the Massachusetts Institute of Technology, lays out a few scenarios that Iran could employ to obstruct tanker traffic in the strait (PDF), including anti-ship missiles and mines.
Analysts disagree on the repercussions of a blockade in the strait. A 2007 report from the U.S. Congress' Joint Economic Committee notes that world oil inventories (PDF) "are sufficient to replace a large stream of oil for many months" and that a "disruption could have little economic effect, if it is temporary and there is no reason to expect a continuing impairment to supply." However, some experts argue that closing the strait even for two weeks would have significant global economic consequences. It also could precipitate major revenue losses for Gulf countries where oil is the main source of wealth.
A pipeline in the United Arab Emirates expected to be open in 2009 bypasses the strait and may encourage investments in other oil routes in the region, according to the Lehman report.
• Niger Delta. Nigeria is the second-largest oil producer in Africa and the fifth- largest oil supplier to the United States. Due to a rise in civil strife, the country dropped from being the world's eighth-largest producer to its twelfth-largest between 2006 and 2008. Since 2005, oil production has fallen by as much as one million barrels per day (LAT), cutting output by almost one-third. The production decline is primarily the work of militants who have taken over or shut down oil facilities; kidnapped and killed oil workers; blown up pipelines; and stolen oil.
The distribution of oil wealth is a central factor in the conflict. Despite its vast oil wealth, 70 percent of Nigeria's population lives on less than a dollar a day and the country has one of Africa's least equal income spreads. Nigeria returned to democratic rule in 1999, but government corruption, especially at the state-level, remains a problem. Pat Utomi of the Lagos Business School-Pan African University points to a number of issues plaguing the Delta, including the large-scale "stealing of crude oil, in which powerful politicians and senior military officials [are] known to be implicated, further aggravating the sense of injury felt by the people in the Niger Delta."
So far reconciliation has remained elusive. Neither the rebels nor the government seem willing to come to compromise, experts say.
• Venezuela. The rise of energy wealth has brought with it increased resource nationalism in major Latin American oil producers such as Venezuela, Bolivia, and Ecuador. In the past several years, these states have renegotiated contracts with international oil companies to give state-run oil companies a controlling interest. Venezuela, the world's ninth-largest producer of oil, also has taken over some projects entirely. The country supplies about 1.5 million barrels per day (bpd) of oil to the United States.
Some experts worry that Venezuela is not investing enough back into oil exploration and infrastructure and instead using oil money to fund other government priorities. Venezuela's state-run oil firm PDVSA, which earned more than $75 billion in 2007, spent $14.4 billion that year on social programs alone. Experts also worry that reduced investment by nationalized firms in new oil and gas infrastructure will lead to production declines over time as maturing wells are not replaced by new exploration, endangering future global supplies. And others express concern that resource nationalism also deters foreign investment (El Universal). "National objectives do not match the needs of the market," Butler says.
Resource nationalism extends well beyond Latin America. More than 90 percent of the world's proven reserves are now in the hands (PDF) of national oil companies. Russian energy expert Nadejda Makarova Victor writes that though Russia's Gazprom controls the world’s largest gas (PDF) resources, "it faces a looming gas crisis as production in its major fields continues to decline, while it fails to invest adequately in new fields." The company hasn't opened a new field since 1991. A report from Russian Industry and Energy Ministry has said that the country may be unable to meet domestic gas requirements (Newsweek) by 2010.
• Iran. Iran is the world's fourth-largest oil producer and third-largest producer of natural gas. The possibility of international sanctions on Iran or military confrontation over its nuclear activities, which Western states see as cover for a nuclear weapons program, are significant supply disruption concerns. Some experts say that the tightness of oil supplies and high oil prices make sanctions unfeasible.
With concerns of an Israeli military strike against Iranian nuclear installations still a fear in July 2008, the head of OPEC warned (FOX) that the cartel would not be able to make up the difference in a loss of output from Iran, which represents about 10 percent of OPEC's total production. Some experts point out that any loss of oil revenue would be economically devastating for Iran.
• Iraq. The country has the third-largest proven oil reserves in the world, but its oil production has not returned to the levels of the early 1990s, before the first of two wars against the United States, when output was slightly less than 3 million bpd. Since the 2003 war began, the country's oil infrastructure has been a target for insurgent attacks and has yet to recover from fifteen years of decline. The Iraqi government hopes to increase its current production of about 2 million bpd to over 4 million bpd by 2013. However, the country's political stability remains tenuous.
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